Is Switzerland the New Japan?

Apr. 25, 2011 7:53 AM ET

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Forex Gump is my incognito name. My real name is Feras Gimp. When I was a kid, my parents would make me hunt and gather food. So every day, I would go fish at a nearby lake and gather corn from the fields. This process took me all day and left no time for me to play. Play time actually didn’t matter because I had no friends to play with anyway because they were all to busy hunting and gathering food as well. One day, while resting under an apple tree, an apple fell and hit me on the head. I came up with an idea where if I focused on just fishing and I could find somebody to focus on just gathering corn, maybe we could finish working faster and have enough time left to play. So I tried it and it worked. I wanted to fully understand why this worked and that’s where I discovered his love for economics. I later became a senior macroeconomics professor at Pipvard University in Pipston, Pipsachussetts. After several decades there, one day I decided to stop teaching. Leaving campus that afternoon, as I reversed out of the parking lot, I reversed into a pristine Bentley. It was Dr. Pipslow’s car. (Now a fellow blogger on BabyPips.com) He had been invited by the school to demonstrate his ability to float currencies. When we met each other, Dr. Pipslow already knew who I was. He told me not to worry about his whip and explained to me that BabyPips.com needed a macroeconomics expert and wondered if I was interested. I was. So the following day, I changed me name to Forex Gump and created Piponomics.

That's right folks, Switzerland might actually be Japan's long lost brother-from-another-samurai-mother! Not only do they both have delicious chocolates and awesome skiing resorts, but they also have some economic similarities as well!Struggle with deflation

For Japan, this has been a well-documented never-ending story. Its monthly CPI report has shown declining prices for the past 24 months. If you think this is a record, think again - for the better part of the 1990s and early 2000s, Japan has been stuck in a deflationary rut.

Switzerland is in the same boat. While the U.K. and the euro zone are experiencing high inflation, Switzerland is sticking out like a sore thumb. Since the beginning of 2010, its monthly CPI report has only shown a positive figure 5 times.

Safe haven currencies

Moving on, the most obvious similarity is that the two have currencies that benefit during times of risk aversion. Yes, I'm talking about the safe haven yen and franc!

When traders feel risk averse, they unwind their short yen positions that were established to fund their positions in riskier assets. Meanwhile, investors favor the franc because of Switzerland's neutrality and stability.

Recently, you can argue that both currencies have taken over the dollar's "ultimate safe haven status." Over the past year, both the yen and franc have straight up murdered the dollar.

A year ago, USD/JPY was trading at around 94.50, continuing its strong downtrend from 2007. Today, the pair is already hovering around 83.00, marking a more than 10% drop.

Meanwhile, USD/CHF has crawled down the charts. After topping out at 1.1600 last May, USD/CHF has dropped more than 2600 pips and is now trading below the .9000 handle. Ballin'!

The pain of a strong currency

Just like Japanese companies, Swiss exporters are starting to feel the weight of a strong currency now, too.

Some of its biggest companies have been blaming their recent slumps on the strong franc. Novartis, Switzerland's biggest exporter by market value, is expected to post a 5% decline in net profits for the first quarter of the year, mainly because of the franc's appreciation.

Even Nestlé, the company that brought us the heavenly goodness that we mortals call "KitKat," can't get a break! It claims that the franc's strength is responsible for a 10% slide in sales!

Their only consolation is that some analysts say the franc's strength is simply cyclical and that it'll die down soon. But... what if they're wrong? *cue gasps*

If the franc's appreciation turns out to be permanent in nature and continues pestering Swiss companies, it may not be long 'til we see the Swiss National Bank (SNB) follow in the footsteps of the Bank of Japan (BOJ) and intervene.

Where the similarities end

This is where the two countries start to diverge. If the SNB decides to step in and stop its currency from rising, it's unlikely that it'll receive the same support from the G7 that the BOJ did when it intervened in the markets.

Why? Aside from the fact that the yen was threatening overall market stability with its unstoppable rampage, Japan really REALLY needed the help. Its recovery was already shaky even BEFORE the earthquake and tsunami struck Japan... what more after!

On the other hand, Switzerland isn't quite as helpless. Following the respectable 0.7% GDP growth in Q3 2010, it posted a healthy 0.9% growth in Q4 as strong domestic demand lifted the economy. Improvements weren't limited to just one or two aspects of the economy either. Switzerland witnessed nice upgrades in private spending, investments, its trade balance, and even in its labor market!

So you see, the two countries may share quite a number of similarities, but the strength of the Swiss economy sets it worlds apart.

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